Essay Question1

Chapter 03 - System Design: Activity-Based Costing

Essay Questions 63. Cosgrove Company manufactures two products, Product K-7 and Product L-15. Product L-15 is of fairly recent origin, having been developed as an attempt to enter a market closely related to that of Product K-7. Product L-15 is the more complex of the two products, requiring 2.0 hours of direct labor time per unit to manufacture compared to 1.0 hour of direct labor time for Product K-7. Product L-15 is produced on an automated production line. Overhead currently is applied to the products on the basis of direct labor-hours. The company estimated it would incur $510,000 in manufacturing overhead costs and produce 10,000 units of Product L-15 and 40,000 units of Product K- 7 during the current year.Unit costs for materials and labor are:

Required: a. Compute the predetermined overhead rate under the current method, and determine the unit product cost of each product for the current year.b. The company is considering the use of activity-based costing as an alternative to its traditional costing method for manufacturing overhead. Data relating to the company's activity cost pools for the current year are given below:

Using the data above, determine the unit product cost of each product for the current year.c. What items of overhead cost make Product L-15 so costly to produce according to the activity-based costing system? What influence might the activity-based costing data have on management's opinions regarding the profitability of Product L-15?

a. The company expects to work 60,000 direct labor-hours during the current year, computed as follows:Product K-7: 40,000 units 1 hour = 40,000 hoursProduct L-15: 10,000 units 2 hours = 20,000 hoursTotal direct labor-hours = 60,000 hoursUsing these hours as a base, the predetermined overhead using direct labor hours would be:Estimated overhead cost, $510,000 Estimated direct labor-hours, 60,000 = $8.50/DLHUsing this overhead rate, the unit product cost of each product would be:

b. The overhead rates for each activity cost pool are as follows:

3-1


The overhead cost charged to each product is:

Overhead cost per unit:Product K-7: $214,500 40,000 units = $5.3625/unit.Product L-15: $295,500 10,000 units = $29.5500/unit.Using activity based costing, the unit product cost of each product would be:

c. Product L-15 accounts for 20% of the company's total product, but requires two-thirds of the total machine set-ups and sixty percent of the machine-hours worked in addition to more than half of the maintenance requests. These factors are concealed when direct labor-hours are used to assign overhead cost to product. Activity-based costing, however, assigns a larger amount of overhead cost to Product L-15. Indeed, Product L-15 may be less profitable than the company has been led to believe under the traditional direct labor approach

64. Flyer Corporation manufactures two products, Product A and Product B. Product B is of fairly recent origin, having been developed as an attempt to enter a market closely related to that of Product A. Product B is the more complex of the two products, requiring three hours of direct labor time per unit to manufacture compared to one and one-half hours of direct labor time for Product A. Product B is produced on an automated production line. Overhead is currently assigned to the products on the basis of direct labor-hours. The company estimated it would incur $396,000 in manufacturing overhead costs and produce 5,500 units of Product B and 22,000 units of Product A during the current year. Unit costs for materials and direct labor are:

Required: a. Compute the predetermined overhead rate under the current method of allocation and determine the unit product cost of each product for the current year.b. The company's overhead costs can be attributed to four major activities. These activities and the amount of overhead cost attributable to each for the current year are given below:

Using the data above and an activity-based costing approach, determine the unit product cost of each product for the current year.

3-2


a. The company expects to work 49,500 direct labor-hours during the current year, computed as follows:

Using these hours as a base, the predetermined overhead using direct labor-hours would be:Predetermined overhead rate = $396,000 49,500 DLHs = $8.00/DLHUsing this overhead rate, the unit product cost of each product would be:

b. The overhead rates are computed as follows:

The overhead cost attributable to each product is:

3-3


Overhead cost per unit:

Product A: $159,400 22,000 units = $7.2455/unitProduct B: $236,600 5,500 units = $43.0182/unitUsing activity-based costing, the unit product cost of each product would be:

65. Daba Company manufactures two products, Product F and Product G. The company expects to produce and sell 1,400 units of Product F and 1,800 units of Product G during the current year. The company uses activity-based costing to compute unit product costs for external reports. Data relating to the company's three activity cost pools are given below for the current year:

Required: Using the activity-based costing approach, determine the overhead cost per unit for each product. The overhead rates for each activity center are as follows:

The overhead cost charged to each product is:

Overhead cost per unit:Product F: $59,930 1,400 units = $42.81 per unitProduct G: $104,310 1,800 units = $57.95 per unit

3-4


AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ApplicationLearning Objective: 2Learning Objective: 3Level: Medium

3-5


66. Lakes Corporation has provided the following data from its activity-based costing accounting system:

Required: Compute the activity rates for each of the three cost pools. Show your work!

67. Data concerning three of Hatt Corporation's activity cost pools appear below:

Required: Compute the activity rates for each of the three cost pools. Show your work!

68. Proudfoot Corporation uses the following activity rates from its activity-based costing to assign overhead costs to

products.

Data concerning two products appear below:

Required: How much overhead cost would be assigned to each of the two products using the company's activity-based costing system?

3-6


69. Whitford Corporation uses the following activity rates from its activity-based costing to assign overhead costs to products.

Data concerning two products appear below:

Required: a. How much overhead cost would be assigned to Product W52Q using the company's activity-based costing system? Show your work! b. How much overhead cost would be assigned to Product Q29D using the company's activity-based costing system? Show your work!

a. Product W52Q

b. Product Q29D

3-7


70. Sailer Corporation uses the following activity rates from its activity-based costing to assign overhead costs to products.

Last year, Product J34U involved 48 batches, 22 customer orders, and 395 assembly hours. Required: How much overhead cost would be assigned to Product J34U using the company's activity-based costing system? Show your work!

Setting up batches

71. Easton Company uses activity-based costing to compute product costs for external reports. The company has three activity centers and applies overhead using predetermined overhead rates for each activity center. Estimated costs and activities for the current year are presented below for the three activity centers:

Actual costs and activities for the current year were as follows:

Required: a. How much total overhead was applied to products during the year? b. By how much was overhead overapplied or underapplied? (Be sure to clearly label your answer as to whether the overhead was overapplied or underapplied.)

3-8


The amount of overhead applied to production is determined as follows:

3-9

Essay Question1

Documents

Transcript of Essay Question1